Last month, Nitin, a college student, earned 22 per cent returns out of his monthly allowances. He is a regular investor in peer-to-peer (P2P) lending platforms, and was attracted to P2P lending by an advertisement which said something like this, “now earn 24 per cent returns on unused liquidity by lending to real people”
In the last one year, no other sector weathered slowdowns and financial crisis in India like the peer-to-peer (P2P) lending - essential platforms which cater to subprime borrowers.
A sunrise sector in the Indian financial sector landscape, P2P lending, has grown more than 10 times in the last one year on a year-on-year basis. The growth has been propelled by recognition from Reserve Bank of India (RBI), which now regulates the sector under a separate category called P2P NBFC (non-banking finance company). Further, in December 2019, the regulator relaxed P2P lending norms by increasing individual lending limit across platforms from Rs 10 lakh to Rs 50 lakh.
With no upper limit on interest rates, one can earn returns ranging between 15-25 per cent annually, or even more, by giving small loans to sub-prime borrowers. However, this unregulated interest rate regime has also sparked a debate over the ethics of earning high returns by lending to financially excluded.
Some of the players in the sectors are themselves wary of this unregulated interest rate regime.
"This is not an avenue to earn high returns. We enable lending to individuals who are financially excluded to sustain their livelihoods. So it goes against principles of natural justice for somebody to earn 30 to 40 per cent return from an individual on such platforms. I had requested RBI to put a cap on interest rates.,” said Ramakrishna NK, cofounder, Rang De.
“There is need for some tab on interest rates…Each P2P firm has its own model. Most of them are positioning themselves as alternative investment platform,” said Rangan Varadan, Co-Founder of Microgram.
In a typical rural-centric P2P model, a website publishes a list of loan-seekers, often financially excluded customers, who mostly meet their credit demands from moneylenders. A prospective lender chooses the borrower of their choice, makes payments through an online platform and gets monthly or quarterly payments on the loan, with an average return of 16-18, going as high as 25 per cent.
In some cases, the P2P company ties up with an MFI or NGO to bring the loan seekers in the platform and monitor the loans. In others cases, they mobilize borrowers and monitor the loans themselves through field campaigns. The P2P platforms retain two to five per cent as fee. For a borrower, depending upon the credit profile, the interest rates could be between 12-36 per cent, on a reducing balance, on an average.
The phenomenal growth in the sector has also come with increasing risk. Rangan agrees that collection is a major concern for the industry.
There is no credit insurance cover available for the loans, apart from life cover in some cases. In the latter case, if the borrower passes away, the insurer pays the money. At present, the default rate in the sector is less than 2 per cent.
RupeeCircle, one of the biggest P2P NBFC, disburses about Rs 3 crore per month, and has grown by more than ten times in the last one year. The average returns for lenders in the platform is about 16-18 per cent, and the company caters to mostly financially excluded people with monthly salary less than Rs 25000-30000 per month, according to Abhishek Gandhi, Co-Founder, RupeeCircle.They pay an interest ranging between 12-36 per cent on a reducing balance in the platform. Most of the clients were serviced by moneylenders, who were charging even more.
Finzy, a P2P NBFC, a quick personal loan platform, has growth ten times in the last one year. According to Amit More, founder, Finzy, clarity in regulations helped the sector to grow phenomenally. “We are positioning ourselves by showing that P2P is an instrument where you earn EMI, rather than giving EMI,” says More. The company has its own recovery team, and default rate is close to 1.02 per cent.
IndiaMoneyMart, another P2P NBFC, has grown by around 300 per cent in the last one year. “In the last one year, there has been a tremendous rise in interest among lenders. An investor can expect a return ere between 16-25 per cent,” says Mahendra Agrawal, cofounder of the company.
As P2P platforms grow by leaps and bounds, giving high returns with moderate risks, it has attracted many novice as well as seasoned investors. However, staying away from greed could be the need of the hour for sustainable growth of the sector.